Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Safe Bulkers (NYSE:SB) are sailing north today as much as 8.1% following release of its fiscal-fourth-quarter earnings in after hours yesterday.
So what: Adjusted earnings per share annihilated the earnings estimates of $0.18, coming in at $0.38 per share, or more than double the average estimates. Safe Bulkers declared a quarterly dividend of $0.06, the same amount declared and paid three months ago.
The beat in and of itself shouldn't be a surprise considering that Safe Bulkers discloses the details of all of its contracts for its ships, which means that any analyst who wanted to do the painstaking work should have been able to figure out the earnings results accurately before they were released.
The pop in the share price may have had more to do with the positive commentary from company president Dr. Loukas Barmparis. He said, "As many of our long duration time charters expired, we have substantial and increasing exposure to the spot market. We believe our ongoing efforts to renew and gradually expand our fleet has positioned us well this early stage of the forthcoming shipping cycle."
Now what: The commentary from Barmparis makes Safe Bulkers the latest dry shipping company to express optimism regarding the future state of the rate environment. By using the term "early stage" he implied that the recovery has a long way to go both in terms of time and rates.
Safe Bulkers is executing a change in strategy from mostly long-term, fixed-rate contracts to more deals that are a function of the daily spot rates. The company has a large amount of its current contracts coming to expiration this year, many of which are below or near the current spot price rates.
If Safe Bulkers is correct about the improving rate environment, this shift in strategy will pay off through higher revenue per ship per day on average. All other things being equal, higher revenue tends to fall straight to the bottom line as higher net income. If so, look for Safe Bulkers to possibly raise its dividend.
If Safe Bulkers is wrong about the rate environment, it could be in trouble. However, it's interesting to note that its three largest and currently most profitable ships, its Capesizes, are all on fixed-rate contracts that don't expire for seven to 17 years. The rates for these ships are between 100% and 200% above the current daily spot rate for Capesize ships so this offers some diversification and protection against Safe Bulkers' strategy of spot rates for the smaller ships in its fleet.
Around two-thirds of its fleet operating days for the remainder of the year are subject to be exposed to the daily spot rate. This amount goes up to 85% for 2015, with the majority of the remaining 15% being the aforementioned high-rated Capesize ships. Safe Bulkers is an excellent position should rates continue to go upward.
Last but not least, Safe Bulkers has eight more ships on order currently being built set mostly for delivery in 2015. If the recovery in the dry shipping business is in full swing by then, Safe Bulkers revenue and earnings should be substantially higher than current. However, a lot of dry shipping companies seem to be thinking this same way, and there is concern expressed by some analysts -- and even some shipping executives -- that the supply of new orders will offset the expected rise in demand.